The cryptocurrency market experienced a significant decline on Wednesday following the Federal Reserve's announcement of a more cautious approach to rate cuts in 2025. The Federal Open Market Committee (FOMC) reduced the federal funds rate by 25 basis points, bringing the rate down to a range of 4.25% to 4.50%. However, the hawkish outlook for the next year overshadowed the rate cut in December, triggering a widespread sell-off in the cryptocurrency space.

Fed's hawkish signal dampens market sentiment

The Fed's decision to reduce the benchmark interest rate by 25 basis points met market expectations. However, the announcement of a slower pace of rate cuts in 2025 created unease among investors. Fed Chair Jerome Powell emphasized a shift in forecasts, with expected rate cuts for 2025 reduced from four to just two. This adjustment reflects a more cautious approach amid concerns over persistent inflation.

Adding to the pessimistic sentiment, the Fed adjusted its forecast for Personal Consumption Expenditures (PCE) inflation for 2025 from 2.1% to 2.5%. This increase suggests that inflationary pressures may remain elevated longer than expected, potentially hindering the anticipated price gains in the cryptocurrency market next year.

Bitcoin and Altcoin lead the market decline

In response to the Fed's announcement, Bitcoin (BTC) fell by 5.4%, closing at $100,314. The cryptocurrency market as a whole lost $200 million in value, with major altcoins following Bitcoin's downward trajectory.

  • Ethereum (ETH) dropped sharply by 6% within 24 hours.

  • XRP fell by 10%, while Solana (SOL) and Dogecoin (DOGE) dropped by 7% and 9%, respectively.

The sudden downturn led to about $675 million in liquidations across the market, with Bitcoin and Ethereum accounting for over $100 million each in extended liquidations.

Macroeconomic factors and market reactions

The spillover effect of the Fed's hawkish tone has spread beyond the cryptocurrency market. The S&P 500 also suffered a significant decline, highlighting the strong correlation between cryptocurrency assets and traditional stocks. Investors' predictions of unfavorable market conditions in 2025 have cast a shadow over both markets, as concerns about inflation and tighter monetary policy weigh on sentiment.

Outlook for 2025

The Fed's cautious stance and upward adjustment of inflation expectations signal a challenging year ahead for both the cryptocurrency and traditional markets. With fewer rate cut plans and persistent inflationary pressures, investors may face increased volatility and reduced risk appetite.

While the interest rate cut in December aligns with previous forecasts, the Fed's long-term outlook emphasizes the potential for prolonged economic instability. For the cryptocurrency market, this could mean facing more obstacles without a clear path to lower borrowing costs and stabilize inflation.

The coming months will be critical as the market adjusts to the Fed's revised path and broader economic factors continue to shape investor behavior.

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